Farm bill favoritism

After a year and a half of haggling over the new farm bill, dairy policy appears to be the final sticking point. It’s a microcosm of the broader farm subsidy discussion that pits the welfare of consumers, taxpayers, and the poor against the interests of agribusiness and farm lobbies.

At issue is a dairy scheme advocated by Rep. Peterson (D-Minn.) and Sen. Leahy (D-Vt.). The proposal illustrates all that is wrong with farm bill politics and policy: to guarantee the earnings of dairies (with outsized benefits to small-scale and increasingly inefficient farms in Minnesota and Vermont), Peterson’s program would raise the price of milk and dairy products for everyone.

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Only in the log-rolling world of Washington farm bill politics would such a program make sense. For the poor, the unemployed, taxpayers and consumers, it does not.

Peterson’s plan starts with the Dairy Margin Protection Program (DMPP), which effectively guarantees an operating profit for dairies. The program would cut checks to farmers when the difference between milk prices and a formula-based estimate of feed costs falls below $4.00 for each hundred pounds of milk they produce. DMPP also includes a heavily-subsidized supplementary insurance program, allowing farmers to insure higher revenue-cost spreads on more of their production.

The DMPP may be unwarranted and wasteful, but its companion program—the Dairy Market Stabilization Program—is destructive. When margins fall below a $6.00 target, the program would prevent wholesale milk purchasers from paying dairies the full price for their milk. Instead, dairies would be required to sacrifice up to 8 percent of their revenue to the USDA. The program would drive up milk prices by providing USDA with funds to buy up “excess supply”, while punishing large dairy farms for producing more milk than Leahy and Peterson think they should.

House Speaker John Boehner (R-Ohio) labelled the program “Soviet-style” agricultural policy. A bipartisan group of 291 House members supported a letter circulated by Reps. Goodlatte (R-Va.) and Scott (D-Ga.) expressing their concerns and voted to exclude Peterson’s supply management provision from the 2013 House farm bill. The opposition isn’t just philosophical; the program would hurt the poor, the jobless, and the taxpayer.

The dairy stabilization program would drive up milk prices to benefit small scale dairy farmers. That hurts all consumers, but impacts the poor—who spend more of their income on staple food products like milk, cheese and yoghurt—most. In 2012, families in the bottom 20 percent of the income distribution devoted 15.8 percent of their spending toward food, while families in the top 20 percent used only 11.4 percent. As a share of after-tax household income, poor families spent 5.7 times more on dairy products than wealthy families, according to BLS data.

Current federal milk programs already impose substantial costs on consumers. Marketing orders, which regulate farm milk sales, require many processors to pay predetermined prices for the milk use. And the Dairy Price Support Program (DPSP) has used government purchases to prop up the prices of dry milk, butter, and cheese. A recent AEI analysis estimated that, on average, current programs cost U.S. consumers $724 million every year. Replacing flawed policies with new programs that will have similar or more costly impacts is not progress.

To protect dairies that don’t expand, the stabilization program punishes successful dairies that do. The most restrictive payment limits are tied to a farm’s “base production” (its highest annual output in the three years before program’s implementation). A successful dairy that expands after signing up for the program will be paid for a fraction of what it produced before the program began —not what it can now produce.

By discouraging efficient dairies from growing, the program would effectively increase milk prices even when payment restrictions are not in effect. Should dairies choose to expand anyway, they would pay a large portion of the new revenue enabled by that expansion to the USDA. That doesn’t encourage innovation or reward success.

Discouraging milk production to artificially increase milk prices prevents new dairy jobs from being created. Worse, artificial price hikes hurt the ability of domestic dairy processers to compete internationally. When domestic dairy processers face higher prices than overseas competition, American processors can no longer compete and US manufacturing jobs are lost.

One example: dairy farmers in Australia and New Zealand lead in selling milk protein concentrate—a protein source in nutrition products—to the United States because U.S. dairy programs artificially raise costs domestically. Those are jobs that Americans could but do not have.

The fiscal costs of new dairy subsidies will fall on the shoulders of U.S. taxpayers, and are likely to range between $700 million to $800 million annually in the near term. Costs could increase substantially if animal feed prices rise or if global market prices for dairy products—like butter, cheese, and powdered milk—fall.

Passage of the Dairy Market Stabilization Program cannot be justified on any sensible grounds—whether the focus is equity, job creation, competitiveness, export growth, or federal spending. Even from a farm safety net perspective, the margin protection program provides far more protection than most American businesses could hope for. Adding a complex and wasteful government supply control system on top of it is inexcusable.

Striking the stabilization program and simplifying the margin insurance program, as Goodlatte and Scott proposed in the original House bill, is a sensible—though not ideal—solution. It would help preserve a robust safety net for producers, increase employment in the U.S. food processing industry, expand exports, and prevent the interests of a few from hurting those who need healthy and affordable food most.

Smith is the agricultural policy expert at the American Enterprise Institute and a professor at the University of Montana. Wassink is a domestic policy researcher at AEI.